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How a Business is Valued
Valuing a business or ownership interest in
a business is a complex
process. Much thought and analysis must go into completing a valuation
if the appropriate conclusion is to be reached. The skills and
expertise of a business valuator play a critical role in determining a
value conclusion.
Three commonly accepted approaches to value are asset, income, and market.
The choice of which approach to adopt depends on the specific facts and
circumstances. Each utilizes various
valuation methodologies. The approaches and methods include:
Income Approach |
Market Approach |
Asset Approach
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Factors to Consider
The income approach may be used to value either a minority or a
controlling interest in a business. The difference lies in either
leaving earnings as-is (i.e. a minority owner cannot change the
financial structure) or adjusting for elements of control (i.e.,
optimizing earnings). Income methods include the discounted cash
flow and the capitalized
earnings methods.
Discounted Cash Flow
(DCF) Method - The DCF method is a multi‑period model which values a
business based on an expected stream of earnings, discounted by a
risk‑adjusted rate of return. The basic theory behind the DCF method is
the value of an asset is equal to the present value of its expected
future economic benefit stream. The DCF method is more appropriate when
the business' operations are not considered stable, or future operations
are expected to grow at widely varying or rapidly increasing rates.
Capitalized Earnings
(CE) Method – The CE method is an abbreviated version of the discounted
cash flow method where growth and the discount rate are assumed to
remain constant into perpetuity. The CE method is most appropriate when
a company's current level of operations is believed to be representative
of future operations, and are expected to grow at a relatively stable
and modest rate.
Barnes Wendling Valuation Services uses
proprietary internal databases to calculate values based on the
discounted cash flow and capitalized earnings methods. Rates of return
or discount rates are compiled using various public sources as well as
our sound judgment and valuation knowledge. |
